LEVEL 8 SYSTEMS - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. ?

LEVEL 8 SYSTEMS, INC.
(Exact name of registrant as specified in its
charter)

New York
11-2920559
(State or other jurisdiction of I.R.S.
Employer
incorporation or organization)
Identification No.)

One Penn Plaza, Suite 3401, New York, New York
10119
(Address of principal executive offices) (Zip
Code)

(212) 244-1234
(Registrant's telephone number, including area
code)

Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01
par value

Indicate by check mark if disclosure of delinquent filers
pursuant to Item
]405 of Regulation S-K is not contained herein, and will not be
contained, to the
best of registrant's knowledge, in definitive proxy or
information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant (1) has
filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of
1934 during the preceding 12 months (or such shorter period that
the registrant
was required to file such reports), and (2) has been subject to
such filing
requirements for the past 90 days.
Yes X No ___.

The aggregate market value of the voting Common Stock held
by
non-affiliates of the registrant was $86,146,545 based on the
price of the last
reported sale on the over-the-counter National Market System on
March 11, 1997
reported by NASDAQ.

As of March 11, 1997, there were 6,961,337 shares of
Common Stock, $.01
par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The responses to items 10, 11, 12, and 13 herein are
incorporated by
reference to certain information in the Company's Definitive
Proxy Statement for
its Annual Meeting of Shareholders to be held May 6, 1997.

PART I

Item 1. Business

General

Level 8 Systems, Inc. (the "Company" or "Level 8")
believes that it has
established itself as a technology leader in the rapidly growing
middleware
marketplace. The Company's middleware products and services,
some of which have
been developed pursuant to contracts with International Business
Machines
Corporation ("IBM") and Microsoft Corporation ("Microsoft"),
utilize messaging
and object technology to solve enterprise-wide integration
problems associated
with linking legacy environments, the desktop and the internet.
During 1996, the
Company entered into agreements with Candle Corporation
("Candle"), pursuant to
which Candle purchased 246,800 shares of Common Stock for $11.00
per share and
acquired certain rights to technology developed by the Company
and will acquire
certain non-exclusive rights to the Company's products, including
Falcon External
Gateways (as described below). In addition, the Company, through
its
wholly-owned subsidiary, ProfitKey International, Inc.
("ProfitKey"), offers MRP
II and shop-floor scheduling packages and related services.

The Company has experienced steady growth on a
quarter-to-quarter basis
in its middleware products and services operations since 1195, as
the Company's
focus and operating strategy have evolved from that of an
industry specific
("vertical") software developer to a provider of middleware
products and
services. Industry sources have estimated that the messaging
middleware market
exceeded $100 million in 1995 and that such market is expected to
grow to
approximately $1.7 billion by the year 2000.

The Company, through its wholly-owned subsidiary, Level 8
Technologies,
Inc. ("Level 8 Technologies"), has been designated an IBM Premier
Partner for IBM
MQSeries. Pursuant to contracts with IBM, Level 8 Technologies
has ported
version 2 of MQSeries to the DEC VMS platform and will be
entitled to royalties,
if any, from sales of the ported products, and has ported IBM's
distributed
object product, DSOM. In addition, the Company provides
installation, education,
integration and help-desk services in support of IBM and Level 8
Technologies
sales of MQSeries licenses. Samuel Somech, co-founder of Level 8
Technologies,
was the original designer of the transactional messaging product
that became
version 1 of MQSeries.

Microsoft has selected the Company to develop messaging
gateways (called
"Falcon External Gateways") to facilitate communications between
computers
running Microsoft's messaging product (called "Falcon") and
various non-Microsoft
environments. Microsoft developed Falcon as a transactional
messaging system for
use within Microsoft Window NT and Windows 95. Level 8
Technologies' Falcon
External Gateways are being developed and are owned by Level 8
Technologies and
facilitate communications of Falcon with IBM MQSeries, mainframes
and UNIX-based
Systems. Microsoft's Falcon and Level 8 Technologies' Falcon
External Gateways
are currently being Beta tested and are expected to be available
for shipment in
mid-1997. Microsoft has indicated an intent to promote Level 8
Technologies'
Falcon External Gateways.

The Company is developing DOT/XM, a product that uses
third-party
transactional messaging and distributed object products in a
Level 8 Technologies
designed tool that facilitates integration of legacy systems into
modern, open
system architectures, by representing the legacy system as a
collection of
objects. The first large commercial installation of DOT/XM is
currently taking
place at ABN/AMRO bank.

The Company's expansion plan is to grow primarily on the
basis of Level
8 Technologies middleware products, such as messaging gateways,
DOT/XM and other
software tools that permit access to legacy information from any
computing
environment. Other products under development by the Company,
and with respect
to which the Company currently is offering consulting services,
are (a) a
publish/subscribe product, which sends designated data
("publish") to interested
users ("subscribers") using transactional messaging as the
delivery mechanism and
(b) an internet-application integration product, which uses
portions of the
DOT/XM framework to integrate commercial transactions on the
internet with legacy
systems of the selling corporation.

Through ProfitKey, the Company offers MRP II and
shop-floor scheduling
software packages, as well as related installation, training and
support
services. Historically, ProfitKey has directed its software
packages to job
shops and custom manufacturers, which use ProfitKey's software
package to
facilitate "just-in-time" deliveries and efficient scheduling of
expensive
shop-floor equipment.

The Company began operations in 1988 as a wholly-owned
subsidiary of Liraz
Systems Ltd. (together with its wholly-owned subsidiaries,
"Liraz"), an Israeli
public company that is a systems integrator. Since 1988, the
Company, through
its ASU consulting division ("ASU"), has provided systems
integration consulting
services primarily to manufacturing businesses in the State of
California. In
October 1994, the Company acquired ProfitKey and Bizware Computer
Systems
(Canada) Inc. ("Bizware"), and, in April 1995, the Company
acquired Level 8
Technologies. In July 1996, the Company decided to focus on the
middleware
activities of Level 8 Technologies, and, in that connection, in
September 1996,
sold substantially all the assets of Bizware for $230,000 and
subsequently
changed the Company's name from Across Data Systems, Inc. to
Level 8 Systems,
Inc. The Company completed a public offering in December 1996,
selling 705,000 shares of Common Stock at an offering price of
$11.00 per share.

Level 8 Technologies Products and Services

Level 8 Technologies' Products. The Company's expansion
plan is to grow
primarily on the basis of middleware products developed by Level
8 Technologies,
such as messaging gateways and software tools that permit access
to legacy
information from any computing environment. Each of the products
offers the
opportunity to deliver services with the products and, to the
extent that the
sale is made directly by the Company, Level 8 Technologies plans
to offer the
services. The products also will be sold through other
distribution channels,
such as Candle, IBM or Microsoft Business Partners, and those
third-party sellers
will be encouraged and trained to provide services. The products
are at various
stages of development, as described below. There can be no
assurance the
development process will not encounter delays and unforeseen
problems, which
could materially delay the commercial introduction of a
particular product or
jeopardize that entire product.

Falcon External Gateways. Microsoft has developed a
transactional
messaging product, Microsoft Falcon, for use with the Microsoft
Windows NT and
Windows 95 operating systems. Level 8 Technologies was selected
by Microsoft to
develop components of software that allow messages to be passed
from Falcon to
IBM MQSeries and directly to other systems, such as mainframes
and those running
the UNIX operating system (collectively, the "Falcon External
Gateways").
Microsoft has agreed to recommend exclusively Level 8
Technologies' Falcon
External Gateways for the first year after commercial release of
the gateways.
IBM has licensed to Level 8 Technologies portions of its API from
IBM MQSeries
for use with the Falcon External Gateways to facilitate
connections between
Microsoft's Falcon and IBM MQSeries. Microsoft's Falcon and
Level 8
Technologies' Falcon External Gateways are in Beta site testing,
and Microsoft's
Falcon and Level 8 Technologies' Falcon External Gateways are
expected to be
available for sale in mid-1997. Level 8 Technologies' Falcon
External Gateways
are expected to sell for $500 to $10,000, depending on the
platform. A gateway
will be purchased for each of the two systems being connected.

Level 8 Technologies' Falcon External Gateway family of
products is
designed primarily for customers using Windows NT LANs
co-existing with other
hardware platforms. By the year 2000, the installed base for
Windows NT has been
projected by industry sources to grow to 7 to 10 million servers.
The Company
estimates that each of 35,000 IBM mainframes and 1.2 million UNIX
systems will
be connected via messaging to multiple Windows NT servers. The
Company believes
that Falcon Gateways will permit interfaces between such systems.

The Falcon Gateways family of products is designed to
provide efficient
and reliable access to IBM mainframes, numerous UNIX platforms,
such as Sun
Solaris, AIX, HP-UX and AT&T GIS, as well as AS/400, OS/2, Sun OS
and VMS.
Communication is accomplished through a reliable message queuing
technology
offering assured message delivery, time independent messaging and
a consistent
API across all platforms.

Distributed Object Transactions. DOT/XM is a Level 8
Technologies
developed tool that facilitates the integration of legacy systems
into modem open
systems architectures by representing legacy systems as a
collection of objects.
It includes a software framework for the server that is a
middle-tier in a
three-tier computing architecture. The server responds to
requests for
information from a front-end client by reformatting the request
for communication
directly to legacy machines in their standard communication
format or via a
transactional messaging product, such as IBM MQSeries. This
"wrapping" of the
legacy machine is accomplished on the server, so that few, if
any, changes to
code are necessary on the legacy machine. The server utilizes
IBM MQSeries as
the transactional messaging vehicle within the server framework
and optionally
to the legacy machine. The server framework also utilizes a
distributed ORB that
complies with the CORBA standard, such as DSOM or ORBIX. The
server has a core
framework of objects that perform the same functions for all
installations of the
server. The framework includes functions such as systems
management,
communications and security. The server also has a class library
of business
objects from which objects will be selected to perform similar
functions for
different operating environments, and it will have custom
business objects
designed for the particular customer. DOT/XM is priced at
approximately $150,000
for a single service application, with site licenses expected to
be priced in the
$500,000 to $1,000,000 range. Installations include extensive
use of services
to customize DOT/XM business objects to particular applications.

Publish/Subscribe. The publish/subscribe product uses
transactional
messaging products, such as MQSeries or Microsoft Falcon, as the
delivery
mechanism to send designated data ("publish") to interested users
("subscribers"). The alternate technique is for interested users
to query the
database on a regular basis to determine if information of
interest has been
added to the database.

Internet-Application Integration. Level 8 Technologies is
developing an
internet-application integration product that uses portions of
the DOT/XM
framework to integrate commercial transactions on the internet
with applications
running on the legacy systems of the selling corporation. A
prototype was
demonstrated at the Object Expo/Java Expo show in New York City
during August
1996. The prototype was a home banking application that used
JAVA apples to
provide the GUI screen for a client that could be located in the
home and used
the internet as the communications link to a server at the bank.
The server
accessed information on the customer from an MVS mainframe using
IBM MQSeries and
portions of the DOT/XM distributed object framework. Level 8
Technologies
believes its technology will be important for companies that wish
to conduct
commerce on the internet and need to integrate that commerce with
the legacy
computers that are being used in their existing businesses.

Level 8 Technologies Services. Level 8 Technologies
provides systems
integration services drawing on its expertise in transactional
messaging and
distributed objects and offers a family of services designed to
meet the needs
of companies installing third-party transactional messaging
products. These
services have been provided to over 40 major companies,
including: financial
institutions, such as ABN/AMRO Bank N.A., American Express, Chase
Manhattan Bank,
Franklin Templeton Group, John Hancock Mutual Life Insurance
Company, NationsBank
Corp., New York Mercantile Exchange, Trigon Blue Cross/Blue
Shield and Travelers
Life Insurance; transportation companies, such as CSX Technology
and Transquest
(Delta Airlines); manufacturing companies, such as Motorola Inc.,
NSK Corp. and
Stanley Tool; retailers, such as K-Mart Corp., The Dillon
Company, Inc. and The
May Company; and government agencies, such as Fannie Mae. The
following packaged
transactional messaging services are being offered for IBM
MQSeries and are
expected to be offered for Microsoft's Falcon:

MQ/Quick Start. A fixed price service designed to
get the customer
started using transactional messaging. Software is installed,
configured and
tested for a particular application. Hands-on training is
provided to customer
personnel.

MQ/Educational Services. Classroom training in
messaging is
provided at the customer's site or at Level 8 Technologies' Boca
Raton, Florida
training facility. Theory is taught in addition to practical
applications,
including an actual application workshop.

MQ/Fast Track Functional Slice. Level 8
Technologies demonstrates
the value of messaging and its business advantage by automating a
chosen
application based on an on-site requirements analysis. If
appropriate, Level 8
Technologies will design graphical user interface screens created
for the
application and integrate messaging and an application into the
client-server
architecture.

MQ/Enterprise Rollout. Level 8 Technologies staff
assist customers
with application of transactional messaging for multiple
applications and
provides skills transfer required to deliver production strength
systems.

MQ/Help Center. Level 8 Technologies offers
continuous help desk
support, which can be accessed by telephone or facsimile or
through the internet.

ProfitKey Products and Services

ProfitKey offers manufacturing resource planning ("MRP
II") and shop-floor
scheduling software packages, and related installation, training
and support
services for use by manufacturing businesses. ProfitKey is a
value added
reseller of various computers, barcode equipment and several
related software
packages.

ProfitKey's principal product, the Rapid Response
Manufacturing software
package, addresses the needs of make-to-order job shop and custom
manufacturers.
The customers of these make-to-order manufacturers, such as large
automobile
companies, frequently impose on their make-to-order suppliers
especially
stringent delivery deadlines, which, in turn, result in unusually
complex
equipment scheduling and other scheduling requirements for the
make-to-order
manufacturer. User preferences will allow users to customize
table displays
according to their own needs. Liraz and ASU have provided
contract development
services for this project. The GUI version of RRM is scheduled
for release in
mid 1996. Rapid Response Manufacturing's particular strength is
its shop-floor
scheduler, which is especially useful for manufacturers
attempting to meet the
"just-in-time" delivery requirements of their customers.
ProfitKey also offers
a fully integr
ated MRP II software package for the make-to- stock manufacturer.

The Rapid Response Manufacturing software package is
comprised of a core
module, plus 20 optional modules to fit the needs of the
particular manufacturer.
The software offers a wide range of easy-to-use tools, including:
a
workbench-style framework with extensive on-screen inquiry
displays, flexible
browse features, pop-up windows and graphs; a variety of loading
and scheduling
options; management query tools for custom reports and
Windows-based export of
data; bar code entry of labor and job tracking data; and numerous
on-screen and
printed reports. The package allows manufacturers to prepare
estimates, enter
orders, manage capacity (labor, materials, machines and work
centers), schedule
and track jobs, manage inventory, prepare shipping documents and
prepare
financial statements.

The software package is priced based on the number and
types of modules
ordered, the hardware platform employed and the number of users.
Typical
configurations on UNIX and Novell platforms sell for
approximately $35,000 to
$40,000; on an AS/400 platform, the package sells for
approximately $70,000 to
$80,000.

The purchase price of ProfitKey software includes a
professional services
audit, which recommends an implementation plan supported by
ProfitKey
consultants. A minimum 10-day implementation plan is required,
but the typical
audit recommends a plan of 30 to 50 days of support services.
The daily rate
charged is between $800 and $ 1,100, depending upon the length of
the contract
and the skills required.

ProfitKey is currently rewriting its software in a fourth
generation
language with graphical user interface. The existing version is
written in
RM/COBOL and runs on UNIX, AS/400 and DOS platforms and Novell
networks and with
ProfitKey's proprietary database or native AS/400 or oracle
databases. The new
product will use an object- oriented programming approach,
employing GUPTA's SQL
Windows, and is being designed to run on multiple hardware
platforms and
commercial databases. The Company believes the new software will
be available
in mid- 1997. However, there can be no assurance the development
process will
not encounter delays and unforeseen problems, which could
materially delay the
commercial introduction of the product or jeopardize the entire
product.

ProfitKey offers an 11-hour hotline to its service
department for
troubleshooting at an hourly charge or as part of an annual
maintenance contract.
ProfitKey's average response time is two hours. ProfitKey offers
its customers
annual maintenance contracts at a cost ranging between 12% and
15% of the base
software license fee, which entitles the customer to telephone
support and new
releases of the software.

ASU Consulting Services

The ASU Consulting group provides consulting services to
high technology
manufacturers in the San Francisco Bay area. The group also
provides contract
development services to ProfitKey and consulting services for
Level 8.

The table below shows the Company's percentage of net
revenues by category
for the years indicated. The revenues for 1995 include the
results of ASU,
ProfitKey and Bizware for the full year, and Level 8 from its
acquisition on
April 1, 1995. The revenues for 1994 include ASU for the full
year, ProfitKey
from its acquisition on October 3, 1994 and Bizware from its
acquisition on
October 28, 1994. The revenues for 1993 include only the results
of the
Company's ASU consulting division.

Percentage of Level 8 Net Sales By Revenue
Category

Consulting
and Services Software
Other Total
1993............... 100% 0%
0% 100%
1994............... 72 25 3
100
1995............... 70 22 8
100
1996............... 72 22 6
100

Markets and Marketing

The Company sells its products and services primarily in
the United
States, with additional sales in Canada and the United Kingdom.

The middleware marketplace is in the early stages of
development.
Industry sources have estimated that the messaging middleware
market exceeded
$100 million in 1995 and that such market is expected to grow to
exceed $1.7
billion by the year 2000. The need for middleware products and
services results
from the move to distributed processing and from the
proliferation of computer
platforms. Businesses that have these disparate systems need a
cost effective
and reliable method to enable the disparate systems to
communicate with each
other. This need has grown as companies have spread
geographically, have
acquired new operations and have offered new services, such as
electronic
commerce on the internet, that require access to information
located throughout
the enterprise. Companies such as IBM, Digital Equipment
Corporation, SUN
Microsystems and Microsoft have introduced middleware products
that work across
multiple platforms and that provide opportunities for add-on
products and
services, such as those provided by Level 8 Technologies.

Level 8 Technologies markets and sells its products and
services by
calling directly on large financial services companies and
through referrals to
other companies from its association with hardware and software
providers. In
July 1996, the Company entered into an agreement with Candle,
pursuant to which,
among other things, the Company agreed to grant Candle certain
distribution
rights and technology licenses for Falcon External Gateways and a
technology
license agreement for DOT/XM. In August 1996, the Company sold
Candle all the
Company's rights to MQ Secure, a security product the Company
developed for IBM
MQSeries. In February 1996, Level 8 Technologies entered into a
licensing
agreement with IBM for portions of IBM MQSeries technology, which
gives IBM
certain rights to distribute Level 8 Technologies' Falcon
External Gateways.

ProfitKey sells into a mature market that has developed
specialty products
for particular manufacturing segments. ProfitKey's expertise is
in shop floor
scheduling systems, which are most important to make-to-order
manufacturers
(i.e., are manufacturers who generally start to manufacture a
product only after
an order is received). These manufacturers tend to be small to
medium in size.
ProfitKey has targeted facilities with 50 to 200 employees and
sells to them with
a direct sales force augmented in some territories by regional
agents.

Customers

In 1996, one customer accounted for approximately $1.3
million of the
Company's revenue, which represented approximately 10% of the
Company's revenue
for the year. No customer accounted for more than 10% of the
Company's revenue
in 1995.

Competition

The Company competes in the application software and
systems integration
services markets, as well as in the developing market for
transactional messaging
and distributed object middleware. Such markets are highly
competitive, and the
Company believes competition will intensify in such markets in
the future. The
Company competes with developers of middleware, such as Digital
Equipment
Corporation, IBM, Candle and Microsoft; with providers of systems
integration
services, such as Andersen Consulting and Logica PLC and numerous
local and
regional providers of consulting and integration services; and
with providers of
software packages for particular markets, such as Fourth Shift
Corporation and
Symix Systems, Inc. The Company's competitors generally have
substantially
larger operations, have broader product lines with greater name
recognition and
market acceptance and have significantly greater financial,
marketing, personnel
and operating resources than the Company.

Intellectual Property

The Company does not have any patents and has not filed
any patent
applications. The Company relies on a combination of trade
secret laws,
nondisclosure and other contractual agreements and technical
measures to protect
its rights in its know-how and its proprietary products. The
foregoing may not
afford the Company sufficient protection for its know-how and
products, and other
parties may develop similar know-how and products, duplicate the
Company's
know-how and products or be granted patents that would materially
and adversely
affect the Company's business.

The Company believes its products and services do not
infringe the rights
of third parties; however, while the Company has not received
notice of any
infringement claims, third parties may assert such claims against
the Company,
and such claims could require the Company to enter into license
agreements with respect to
the technology in question or enter into royalty arrangements or
could result in
litigation, which could materially and adversely affect the
Company's business.
There can be no assurance the Company would acquire such licenses
on terms
acceptable to the Company or at all. Any failure of the Company
to acquire such
licenses could materially and adversely affect the Company's
business and
prospects.

Employees

The Company believes its employee relations are
satisfactory. The
employees are not represented by a labor union, and the Company
has never
experienced any labor problems resulting in a work stoppage. As
of December 31,
1996, the Company had 118 employees.

Executive Officers of the Registrant

The names, ages and positions of the executive officers of
the Company are
listed below, along with their business experience during the
past five years.
The officers are elected annually and serve at the discretion of
the
Board of Directors:

Name Age Office Business
Experience During
The Past
Five Years
Arie Kilman 43 Chief Executive Officer Chief
Executive Officer
and Director of the
Company since July
1996,
President of the
Company
from July 1996 to
October
1996, Chairman of
the Board
of Directors of
the
Company from December
1994 to
July 1996.
Chairman
and Chief
Executive
Officer of Level
8
Technologies from July
1996.
Chairman of the
Board and
President of
Liraz
Systems, Ltd. since
1983.

Robert R. McDonald 52 Chairman of the Board of Chairman of
the Board of
Directors Directors
from July 1996,
President
and Chief
Executive
Officer of the
Company
from October 1994
to July
1996, Director
since
December 1994,
Treasurer
of the Company
from
December 1994 to
April
1995, Chairman of
the Board
and Chief
Executive
Officer of
Bizware
from October 1994
to
September 1996,
President
and Chief
Executive
Officer of
ProfitKey
from May 1994
to July
1996 and Director
of
ProfitKey since
November
1984, Chairman
of the
Board of Land and
Sea, Inc.
since March
1990, and
Chief Executive
Officer of
Land and Sea,
Inc. from
March 1990 to
December
1994. As of February 10,
1997
Robert MacDonald has served as
President
and General Manager of
Bios
Group, LP.

Joseph J. Di Zazzo 38 Controller; Chief Chief
Accounting Officer,
Accounting Officer; Treasurer
and Secretary
Treasurer and Secretary of the
Company since April
1995,
Controller since
January
1995, Vice
President,
Finance of
ProfitKey
since January
1995,
Controller of
ProfitKey
from May
1992 to
January 1995,

self-employed in video
business
from June 1991
to May
1992, Controller
of
Workstation

Technologies from April
1987 to
June 1991.

Samuel Somech 44 President and Director President
of the Company
since
October 1996,
Director
of the Company
since
April 1995, Vice
President
of the Company
from April
1995 to October
1996,
President and Chief
Operating
Officer of Level
8
Technologies since April
1995,
Co-founder of Level
8 in
February 1994,
Technical
Director,
Messaging
Group of Apertus

Technologies, Inc. from
January
1994 to March
1994,
Technical Director,
Messaging
Group of NYNEX
from
September 1990 to
December
1993.

Item 2. Properties

The Company leases approximately 29,000 square feet of
administrative
space. The Company's facilities are as follows:

Ownership Square
Location Function Status
Feet

Salem, New Hampshire Corporate offices ProfitKey Leased
15,600

New York, New York Corporate office of Level 8 and Leased
5,125
Level 8 Technologies

Framingham, Development office for Level 8 Leased
700
Massachusetts Technologies

Boca Raton, Florida Development office for Level 8 Leased
3,950
Technologies

Boca Raton, Florida Training facility for Level 8 Leased
1,740
Technologies

Santa Clara, California Corporate office of ASU Leased
1,750

The corporate offices of Level 8 and Level 8 Technologies
in New York are
covered by a lease that expires in November 2000. The lease for
the ProfitKey
office in Salem, New Hampshire expires in October 1999. The
Level 8 Technologies
development office lease in Framingham can be terminated by
either party on 30 days
notice. The Level 8 Technologies development office lease in
Boca Raton expires
in July 1999 and the training office lease in Boca Raton can be
terminated by either
party on 15 days notice. The lease for the ASU office in Santa
Clara expires in
May 1997.

Item 3. Legal Proceedings

From time to time the Company is involved in litigation
relating to claims
arising from its operations in the normal course of business. As
of the date of
this filing, neither the Company nor any of its subsidiaries is a
party to any
legal proceedings, the adverse outcome of which, in management's
opinion, would
have a material adverse effect on the Company's results of
operations or
financial position.

Item 4. Submission of Matters To A Vote of Security Holders

No matters were submitted to a vote to the Company's
security holders
during the fourth quarter of 1996.

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder
Matters

The Company's Common Stock is traded on the NASDAQ National
Market System
under the symbol "LEVEL". The following table sets forth the
high and low last
reported sale prices for the Common Stock for the periods
indicated, as reported
by the NASDAQ National Market.

Period High
Low

1995:
Third Quarter (from July 27) 10 3/8
6 1/2
Fourth Quarter 8
5 1/2
1996:
First Quarter 8 1/8
5 1/2
Second Quarter 15 1/2
7
Third Quarter 12 1/2
8 1/8
Fourth Quarter 15 7/8
9 1/4

The Company has never declared or paid a cash dividend on
its Common Stock,
and it is anticipated that the Company will continue to retain
its earnings for
use in its business. Declaration of dividends is within the
discretion of the
Company's Board of Directors and will depend upon the earnings,
capital
requirements and financial position of the Company, general
economic conditions
and other pertinent factors.

As of March 11, 1997, there were 92 holders of record of
the Common Stock
of the Company.

Item 6. Selected Financial Data

For 1996, the following data includes ASU, ProfitKey and
Level 8
Technologies for the full year and Bizware until its sale in
September 1996. For
1995, the following data includes ASU, ProfitKey and Bizware for
the full year
and Level 8 Technologies since its acquisition on April 1, 1995.
For 1994, the following data
includes ASU, ProfitKey since its acquisition on October 3, 1994
and Bizware
since its acquisition on October 28, 1994. Periods prior to 1994
include only
the operations of ASU.

SELECTED STATEMENT OF OPERATIONS DATA

Year Ended December 31,

1992 1993 1994 1995
1996

Revenue $948,505 $1,312,935 $3,596,602 $10,139,024
$13,075,338

Net income (loss) ($ 59,443) ($ 32,712)$ 563,590 $ 618,049
($ 2,369,397)

Net income (loss)
per common and
common equivalent
share ($ .02) ($ .01) $ .15 $ .13
($ .39)

Weighted average
common and common
equivalent shares
outstanding 3,839,166 3,839,166 3,839,166 4,777,758
6,076,013

SELECTED BALANCE SHEET DATA

At December
31,

1992 1993 1994 1995
1996

Working capital
(deficiency) $181,812 $290,991 ($1,679,294) $4,103,621
$11,007,583

Total assets 338,213 438,340 5,848,838 15,059,198
22,112,453

Long-term debt,
net 16,253 6,771 19,053 43,975
23,297

Loans from
related companies,
net 273,900 418,900 2,015,165 453,847
330,706

Shareholders'
equity (deficit) (52,695) (85,407) 489,729 11,498,535
18,300,153

Item 7. Management's Discussion and Analysis of Financial
Condition and Results
of Operations

General

The Company's only operations prior to the acquisitions of
ProfitKey and
Bizware in October 1994 and Level 8 Technologies in April 1995
were certain limited consulting
services through its ASU consulting division. The following
discussion reflects
the activities of ProfitKey from its acquisition date of October
3, 1994, Bizware
from its acquisition date of October 28, 1994 through its sale on
September 9,
1996 and Level 8 Technologies from its acquisition date of April
1, 1995.

Prior to the acquisition of ProfitKey in October 1994, the
Company did not
have any substantial non-cash charges to earnings. Upon the
acquisition of
ProfitKey and the subsequent acquisitions of Bizware and Level 8
Technologies,
the Company began to incur substantial non-cash charges to
earnings due to
amortization of goodwill associated with the acquisitions of
Level 8 and Bizware,
amortization of service contracts of ProfitKey and amortization
of software
development costs of ProfitKey and Bizware. As a consequence of
the amortization
of intangible assets, the Company will record amortization
expense of
approximately $529,000 each year through 2001, and a reduced
amount each year for
13 years thereafter.

In July 1996, the Company decided to focus on the
middleware activities of
Level 8 Technologies. As part of that strategy, on September 9,
1996, the
Company sold substantially all the assets of Bizware, for
$230,000, and, in that
connection, the Company recognized a loss of $1,484,061.

Results of Operations

1996 and 1995

Revenue increased from $10,139,024 in 1995 to $13,075,338
in 1996, an
increase of approximately 29%. The increase was primarily due to
an increase in
Level 8 Technologies revenue of approximately $4,144,000 (201%).
Approximately
$618,000 of the increase in revenue of Level 8 Technologies was
attributable to
inclusion of the revenue of Level 8 Technologies for the entire
year in 1996
compared to only nine months in 1995 following the acquisition of
Level 8
Technologies on April 1, 1995, and approximately $3,526,000 was
attributable to
an increase in Level 8 Technologies revenue during the comparable
nine-month
period. The increase in revenue of Level 8 Technologies was
offset, in part, by
a decrease in revenue of Bizware of approximately $1,043,000.

Cost of revenue increased from $4,514,207 in 1995 to
$7,220,106 in 1996,
an increase of approximately 60%. The increase was primarily
related to an
increase in cost of revenue at Level 8 Technologies of
approximately $2,319,000
(199%). Approximately $379,000 of the increase in cost of
revenue of Level 8
Technologies was attributable to the inclusion of cost of revenue
of Level 8
Technologies for the entire year of 1996 compared to only nine
months of 1995
following the acquisition of Level 8 Technologies on April 1,
1995, and
approximately $1,940,000 was attributable to an increase in cost
of revenue of
Level 8 Technologies during the comparable nine- month period.
As a percentage
of revenue, cost of revenue increased from approximately 45% in
1995 to
approximately 55% in 1996. This increase was primarily
attributable to an 84%
cost of revenue for sales in 1996 of $1,485,000 of third-party
software licenses.

Operating expenses for 1996 increased approximately
$3,728,000 (78%) from
1995. The increase in operating expenses includes a one time
charge of
$1,484,000 related to the sale of substantially all the assets of
Bizware.
Operating expenses net of the one time charge related to the sale
Bizware
increased approximately $2,244,000 (47%) from 1995 to 1996. The
increase was
attributable primarily to Level 8 Technologies opening a new
office in Boca
Raton, Florida and related staffing expenses and an additional
three months of
operations in 1996 for Level 8 Technologies totaling
approximately $1,778,000.
The balance of the increase was due to increased sales and
marketing expenses at
ProfitKey and increased general corporate overhead. Operating
expense for 1996
includes amortization of goodwill and service contracts acquired
of $527,786 and
$108,271, respectively, compared to $430,144 and $144,951,
respectively, in 1995.
As a percentage of revenue, operating expenses, including the one
time charge
related to the sale of Bizware, increased from 47% in 1995 to 65%
in 1996.
Operating expenses, net of the one time charge related to the
sale of Bizware,
increased from 47% in 1995 to 54% in 1996.

Other income increased from 1995 to 1996 by approximately
$68,000. The
increase was attributable primarily to an approximately $48,000
increase in
interest earned from investment of cash remaining from the
Company's initial
public offering and the Candle investment and a decrease of
approximately $21,000
interest expense from 1995 to 1996 related to a decrease in the
Company's debt.

Income tax expense (benefit) was (6%) and 31% of income
before taxes and
minority interest for 1996 and 1995, respectively. The effective
tax rate
differed from the federal statutory tax rate (i.e., 34%) in 1996
primarily due
to the nondeductibility of the loss on the sale of Bizware and
the change in the
non-deductible goodwill amortization.

Minority interest in income of consolidated subsidiary was
eliminated
starting April 3, 1995, when the Company acquired the minority
interest in
ProfitKey.

1995 and 1994

Revenue for 1995 increased by approximately $6,500,000
(182%) over the
prior year. The increase was attributable primarily to the
acquisitions of
ProfitKey on October 3, 1994, Bizware on October 28, 1994 and
Level 8
Technologies on April 1, 1995.

Cost of revenue for 1995 increased by approximately
$2,800,000 (165%) over
the prior year. The increase was attributable primarily to the
acquisitions of
ProfitKey, Bizware and Level 8 Technologies. As a percentage of
revenue, cost
of revenue decreased from 47% in 1994 to 45% in 1995. This
decrease was
attributable primarily to lower cost of revenue for Bizware,
which resulted from
a high margin contract that concluded during the second quarter
of 1995.

Operating expense for 1995 increased by approximately
$3,600,000 (289%)
over the prior year. The increase was attributable primarily to
the acquisitions
of ProfitKey, Bizware and Level 8 Technologies. As a percentage
of revenue,
operating expense increased from 34% during 1994 to 47% during
1995. This
increase was attributable to an increase in amortization of
goodwill and service
contracts from approximately $55,000 during 1994 to approximately
$575,000 during
1995, higher operating expenses at Bizware and Level 8
Technologies, which only
had an impact after their dates of acquisition, and the addition
of corporate
overhead starting in October 1994.

Income tax expense was 31% and 19% of income before taxes
and minority
interest for 1995 and 1994, respectively. The effective tax rate
for 1994
differs from the federal statutory tax rate (i.e., 34%) primarily
due to the
effect of foreign tax rates and credits and the utilization of
net operating loss
carryforwards.

Liquidity and Capital Resources

In 1996, the Company funded its operations with cash
remaining from its
initial public offering. During 1996, the Company used
approximately $1,556,000
of cash for operations, approximately $2,057,000 for capitalized
software
development costs and approximately $677,000 for equipment. In
July 1996, Candle
acquired 246,800 shares of Common Stock for $11.00 per share.
The proceeds from
the Candle investment and the proceeds from the Company's public
offering in
December 1996 (approximately $7 million) have been invested
primarily in
short-term, interest-bearing securities. At December 31, 1996,
the Company had
working capital of approximately $11,008,000 and a current ratio
of 4.28.

The Company intends to accelerate its software development,
expand its
sales force and increase its marketing activities, and the
Company may acquire
software businesses and software licenses. To the extent that
funds from
operations are not sufficient for these purposes, the Company
will fund those
activities from its existing working capital resource.

The Company believes that its existing working capital and
anticipated
funds generated from operations will be sufficient to fund its
working capital
and capital expenditure requirements through June 1998.

Item 8. Financial Statements and Supplementary Data

The Company's Consolidated Financial Statements and the
Report of
Independent Public Accountants are presented in the following
pages. The
Consolidated Financial Statements filed in Item 8 are as follows:

Independent Auditor's Report.

Consolidated Statements of Operations for the years ended
December 31,
1996, 1995 and 1994.

Consolidated Balance Sheets as of December 31, 1996 and
1995.

Consolidated Statements of Changes in Shareholders' Equity
for the years
ended December 31 1996, 1995 and 1994.

Consolidated Statements of Cash Flows for the years ended
December 31,
1996, 1995 and 1994.

Notes to Consolidated Financial Statements.

Item 9. Change in and Disagreements With Accountants on
Accounting and Financial
Disclosure

Not Applicable.

INDEPENDENT AUDITOR'S REPORT

Shareholders and Board of Directors
LEVEL 8 SYSTEMS, INC.
Salem, New Hampshire

We have audited the accompanying consolidated balance sheets of
LEVEL 8 SYSTEMS,
INC. AND SUBSIDIARIES (formally Across Data Systems, Inc.) as of
December 31,
1996 and 1995, and the related consolidated statements of
operations, changes in
shareholders' equity, and cash flows for each of the three years
in the period
ended December 31, 1996. Our audits also included the financial
statement
schedule listed in the Index at Item 14(b)2. These financial
statements and
financial statement schedule are the responsibility of the
Company's management.
Our responsibility is to express an opinion on these financial
statements and
financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards.
Those standards require that we plan and perform the audit to
obtain reasonable
assurance about whether the financial statements are free of
material
misstatements. An audit includes examining, on a test basis,
evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes
assessing the accounting principles used and significant
estimates made by
management, as well as evaluating the overall financial statement
presentation.
We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above
present fairly, in all
material respects, the consolidated financial position of LEVEL 8
SYSTEMS, INC.
AND SUBSIDIARIES as of December 31, 1996 and 1995, and the
results of their
operations and their cash flows for each of the three years in
the period ended
December 31, 1996, in conformity with generally accepted
accounting principles.
Also, in our opinion, such financial statement schedule, when
considered in
relation to the basic financial statements taken as a whole,
presents fairly in
all material respects the information set forth therein.

LURIE, BESIKOF, LAPIDUS
& CO., LLP

Minneapolis, Minnesota
January 31, 1997

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995, and
1994

1996 1995
1994

REVENUE
Consulting and service $ 9,357,493 $ 7,060,590
$ 2,574,108
Software 2,856,455 2,257,286
896,268
Other 861,390 821,148
126,226
13,075,338 10,139,024
3,596,602

COST OF REVENUE
Consulting and service 4,558,098 3,571,535
1,428,400
Software 2,142,423 341,655
162,090
Other 519,585 601,017
111,927
7,220,106 4,514,207
1,702,417

GROSS MARGIN 5,855,232 5,624,817
1,894,185

OPERATING EXPENSES
Selling, general and
administrative 6,388,971 4,205,943
1,173,071
Amortization of goodwill
and service contracts
acquired 636,057 575,095
54,724
7,025,028 4,781,038
1,227,795

OPERATING INCOME (LOSS) BEFORE
LOSS ON SALE OF SUBSIDIARY (1,169,796) 843,779
666,390

LOSS ON SALE OF SUBSIDIARY (1,484,061) -
-

OPERATING INCOME (LOSS) (2,653,857) 843,779
666,390

OTHER INCOME (EXPENSE)
Interest income 170,963 122,994
677
Interest expense (34,203) (54,733)
(8,720)
Gain on settlement of
accounts payable - -
58,330
136,760 68,261
50,287

INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST (2,517,097) 912,040
716,677

INCOME TAX EXPENSE (BENEFIT) (147,700) 278,700
133,200

INCOME (LOSS) BEFORE MINORITY
INTEREST (2,369,397) 633,340
583,477

MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARY - 15,291
19,887
NET INCOME (LOSS) ($2,369,397) $ 618,049
$ 563,590

NET INCOME (LOSS) PER
COMMON SHARE ($ .39) $ .13
$ .15

WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES 6,076,013 4,777,758
3,839,166

See notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS 1996
1995

CURRENT ASSETS
Cash and cash equivalents $ 3,531,102
$3,147,509
Marketable securities 6,524,758
2,044,962
Accounts receivable, less allowance
for doubtful accounts of $282,000
and $75,000, respectively 2,977,260
1,423,603
Income taxes receivable 591,004
-
Inventory 143,874
125,334
Prepaid expenses and other assets 261,182
157,054
Deferred income taxes 331,200
268,000
TOTAL CURRENT ASSETS 14,360,380
7,166,462

PROPERTY AND EQUIPMENT 958,110
586,881
OTHER ASSETS
Excess of cost over net assets of businesses
acquired, net 2,215,347
3,717,393
Service contracts acquired, net 1,834,469
2,016,850
Software development costs, net 2,693,114
1,505,169
Deposits and deferred costs 51,033
40,043
Deferred income taxes -
26,400
6,793,963
7,305,855
$ 22,112,453
$ 15,059,198
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of loan from related company $ 122,000
$ 117,000
Current maturities of long-term debt 8,593
36,131
Accounts payable 1,120,070
514,249
Accrued expenses 549,172
444,841
Income taxes payable -
88,412
Customer deposits 153,816
213,221
Deferred revenue 1,399,146
1,648,987
TOTAL CURRENT LIABILITIES 3,352,797
3,062,841

OTHER LIABILITIES
Loan from related company, net of current
maturities 330,706
453,847
Long-term debt, net of current maturities 23,297
43,975
Deferred income taxes 105,500
-
459,503
497,822

COMMITMENTS

SHAREHOLDER'S EQUITY
Preferred stock, $.01 par value (authorized -
1,000,000 shares; no shares issued and
outstanding) -
-
Common stock, $.01 par value (authorized -
15,000,000 shares; issued and outstanding -
6,954,366 and 5,922,410, respectively) 69,543
59,224
Additional paid-in capital 19,506,914
10,371,302
Retained earnings (deficit) (1,273,175)
1,096,222
Unearned compensation (3,129)
(33,323)
Foreign currency translation adjustments -
5,110
18,300,153
11,498,535
$ 22,112,453 $
15,059,198

See notes to consolidated financial statements.

LEVEL 8 SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995
and 1994

Foreign
Additional Retained Unearned
Currency
Common Stock Paid-in Earnings Compen-
Translation
Shares Amount Capital (Deficit) sation
Adjustments Total

BALANCE AT
DECEMBER 31,
1993 2,911,863 $ 10 $ - ($ 85,417)$ - $-
($ 85,407)
Common
Stock
issued 97,256 16,700 - - - -
16,700
Net income - - - 563,590 - -
563,590
Foreign
currency trans-
lation ad-
justment - - - - -
(5,154) (5,154)

BALANCE AT
DECEMBER 31,
1994 3,009,119 16,710 - 478,173 -
(5,154) 489,729
Recapitalization - 10,179 (10,179) - - -
-
Common stock issued:
Prior to
initial public
offering 394,315 3,943 521,057 - - -
525,000
Level 8
Technologies
acquisition 525,159 5,252 1,570,225 - -
- - 1,575,477
Conversion of
loan from
related company
to equity 471,264 4,713 2,045,287 - -
- - 2,050,000
Initial
Public
Offering 1,430,000 14,300 5,913,063 - -
- - 5,927,363
Conversion of
minority
common
shares of
ProfitKey 91,344 913 273,119 - -
- - 274,032
Stock
Options 1,209 12 988 - -
- - 1,000
Other 19,801 3,400 - - -
- - 3,400
Common stock
repurchased (19,801) (198) (3,202) - -
- - (3,400)
Net income - - - 618,049 -
- - 618,049
Unearned
compensation
related to
issuance of
stock options - - 68,285 - (68,285)
- - -
Adjustment of
unearned
compensation - - (7,341) - 34,962 -
27,621
Foreign
currency
translation
adjustment - - - - -
10,264 10,264

BALANCE AT
DECEMBER 31,
1995 5,922,410 59,224 10,371,302 1,096,222 (33,323)
5,110 11,498,535
Common stock issued:
Candle
Corporation 246,800 2,468 2,607,274 - -
- - 2,609,742
Public
offering 705,000 7,050 6,470,147 - -
- - 6,477,197
Stock
options 80,156 801 58,191 - -
- - 58,992
Net loss - - - (2,369,397) -
- - (2,369,397)
Adjustment
of unearned
compensation - - - - 30,194
- - 30,194
Foreign
currency
translation
adjustment - - - - -
(5,110) (5,110)
- - - - -
- -

BALANCE AT - - - - -
- -
DECEMBER 31,
1996 6,954,366 $69,543 $19,506,914 ($1,273,175) ($3,129)
$- $18,300,153

See notes to consolidated financial statements.

LEVEL 8 SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years Ended December 31, 1996, 1995
and 1994

1996 1995
1994

OPERATING ACTIVITIES
Net income (loss) ($2,369,397) $ 618,049
$ 563,590
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation 226,808 135,942
35,475
Amortization 1,031,413 640,646
68,918
Loss on sale of subsidiary 1,484,061 -
-
Tax effect of utilizing
deferred tax assets
reserved at date of acquisition 49,600 448,700
289,700
Deferred income taxes 19,100 (529,700)
(266,700)
Minority interest in
consolidated subsidiary income - 15,291
19,887
Accrued interest income - (45,190)
-
Gain on settlement of
accounts payable - -
(58,300)
Gain on sale of automobile - -
(2,099)
Expenses paid by and included
in loans from related companies - -
13,486
Changes in operating assets and
liabilities, exclusive
of those arising from
business acquisitions and sale:
Accounts receivable (1,481,163) 941,612
(46,782)
Income taxes receivable (592,491) -
-
Inventory and unbilled
revenue and client costs (18,540) (61,647)
144,266
Prepaid expenses and other assets (125,350) (77,789)
15,835
Deposits and deferred costs (15,796) (19,051)
21,193
Accounts payable 660,834 (252,954)
(226,528)
Accrued expenses 73 (282,237)
(4,134)
Income taxes payable (115,605) (218,307)
173,175
Customer deposits (59,405) (77,185)
(472,086)
Deferred revenue (249,949) 50,757
(853)
Net cash provided (used)
by operating activities (1,555,807) 1,286,937
268,013

INVESTING ACTIVITIES
Purchase of marketable securities (6,524,758) (1,999,772)
-
Redemption of marketable securities 2,044,962 -
-
Purchase of property and equipment (676,914) (380,686)
(68,976)
Software development costs (2,057,345) (836,852)
(16,073)
Employee advances (repayments) 21,225 (9,033)
6,401
Proceeds from sales of subsidiary 156,667 -
-
Payments and advances to former
shareholders of acquired
subsidiary - (739,678)
-
Payments received on advances
to former shareholders of
acquired subsidiary - 236,708
-
Cost of acquisitions - (2,151,302)
(1,190,956)
Cash acquired in acquisitions - 5,669
1,439,932
Net cash provided (used)
by investing activities (7,036,163) (5,874,946)
170,328

(continued)
See notes to consolidated financial statements.
LEVEL 8 SYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS (continued
Years Ended December 31, 1996, 1995
and 1994

1996 1995
1994

FINANCING ACTIVITIES
Proceeds from issuance of
common stock $10,469,800 $ 8,393,400 $
16,700
Cost of issuance of
common stock (1,382,861) (1,937,637)
-
Proceeds from exercise of
stock options 58,992 1,000
-
Repurchase of common stock - (3,400)
-
Repayments on loans from
related companies (118,141) (907,325)
-
Loans from related companies - 1,513,007
195,000
Payments on long-term debt (48,216) (82,307)
(34,118)
Proceeds from long-term debt - 72,095
-
Net cash provided by
financing activities 8,979,574 7,048,833
177,582

EFFECT OF EXCHANGE RATE CHANGES
ON CASH (4,011) (4,620)
17,826

NET INCREASE IN CASH AND CASH
EQUIVALENTS 383,593 2,456,204
633,749

CASH AND CASH EQUIVALENTS
Beginning of year 3,147,509 691,305
57,556

End of year $ 3,531,102 $ 3,147,509
$ 691,305

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 34,203 $ 54,733
$ 8,720
Cash paid (received)
for income taxes 183,467 375,916
(63,141)

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING
ACTIVITIES

The Company acquired companies as follows:

1995
1994

Cost of net assets acquired (Note 2) $ 3,575,477 $
2,424,275
Additional direct costs 151,302
154,669
Common stock issued (1,575,477)
-
Paid directly by parent company (noncash) -
(1,387,988)

Cash cost of acquisition $ 3,531,102 $ 2,151,302 $
1,190,956

In 1995, the Company converted $2,050,000 of loans from related
companies into
471,264 shares of common stock.

The Company financed the sale of a subsidiary and has a
receivable of $73,333 at
December 31, 1996.

See notes to consolidated financial statements.

(continued)
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and Summary of Significant
Accounting Policies -

The Company

Level 8 Systems, Inc. (Level 8, formerly Across Data
Systems, Inc.)
develops and sells proprietary vertical application
software packages and
provides software consulting and support services to
customers located
primarily in the United States and Canada. On October 3,
1994, Level 8
acquired 92% (100%-owned at April 3, 1995) of ProfitKey
International,
Inc. (ProfitKey). ProfitKey provides computer consulting
services and
sells turnkey manufacturing resource planning (MRP II) and
scheduling
software packages to manufacturing companies. On October
28, 1994, Level
8 also incorporated a 100%-owned Canadian subsidiary,
3077934 Canada,
Inc., which in turn acquired 99% (100%-owned at June 30,
1995) of Bizware
Computer Systems (Canada) Inc. (Bizware). Bizware sold
software packages
that provide cost information used by the petroleum and
retail industries
to manage and control individual retail outlets and groups
of outlets. On
September 9, 1996, Level 8 sold Bizware (Note 8).
Effective April 1,
1995, Level 8 acquired 100% of Level 8 Technologies, Inc.
(Level 8
Technologies, formerly Level 8 Systems, Inc.). Level 8
Technologies
specializes in transactional messaging middleware and
distributed object
technology. Level 8 Technologies provides consulting
services to the
financial services industry and to computer hardware and
software
providers, and has begun to package portions of its
distributed objects
for sale to the financial services industry. Level 8
Technologies also
sell third party software through licensing agreements.

Liraz Systems Ltd. and its wholly-owned subsidiaries own
approximately 53%
of Level 8's common stock at December 31, 1996.

Principals of Consolidation

The consolidated financial statements include the accounts
of Level 8, its
U.S. subsidiaries, ProfitKey and Level 8 Technologies, and
its Canadian
subsidiaries, 3077934 Canada, Inc. and Bizware (through
September 9,
1996), collectively referred to as the Company. All
subsidiaries
financial information is included from the date of
acquisition. All
intercompany accounts and transactions are eliminated in
consolidation.

Use of Estimates

The preparation of financial statements in conformity with
generally
accepted accounting principles requires management to make
estimates and
assumptions that affect the reported amounts and
disclosures in these
financial statements. Actual results could differ from
those estimates.
Significant management estimates relate to the amortization
periods for
intangible assets, the allowance for doubtful accounts, and
the valuation
allowance for deferred tax assets.

Foreign Currency Translation

Assets and liabilities of Bizware were translated at the
exchange rate in
effect at the balance sheet date. Revenue and expenses
were translated at
the average exchange rate prevailing during the year.
Translation
adjustments arising from the use of differing exchange
rates were included
as foreign currency translation adjustments in
shareholders' equity
through the date of sale.

(continued)

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and Summary of Significant
Accounting Policies
- (continued)

Fair Value of Financial Instruments

The carrying amounts of financial instruments consisting of
cash,
receivables, long-term debt, and accounts payable
approximate their fair
values. It is not practicable to determine the fair value
of the loan
from the related company due to the related party nature of
the
transaction.

Revenue Recognition

The Company recognizes revenue from the sale of a software
and hardware
system at the time of the installation of the system,
provided no
significant obligations remain and collection of the
resulting receivable
is deemed probable. Revenue from add-on hardware sales is
recognized when
the hardware is shipped to the customer. Revenue related
to service
contracts is recognized ratably over the terms of the
contracts.
Consulting and specialized software development revenue is
recognized in
accordance with the terms of the contract.

Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments
purchased with
original maturities of three months or less to be cash
equivalents.
Investments with original maturities in excess of three
months are
classified as marketable securities based on the maturity
date.

Marketable securities at December 31, 1996, consisting of
U.S. Government
agency bonds, are considered to be "available for sale,"
and are reported
at cost which approximates fair market value. Marketable
securities at
December 31, 1995, consisting of U.S. Treasury Bills, were
considered by
management to be "held to maturity," and therefore were
reported at
amortized cost which approximates market value. The U.S.
Treasury Bills
were redeemed at maturity resulting in no gain or loss.

The Company maintains cash in bank deposit accounts which,
at times, may
exceed federally insured limits. The Company has not
experienced any
losses in such accounts and does not believe it is exposed
to any
significant credit risk on cash.

Inventory

Inventory is valued at the lower of cost (first-in,
first-out) or market
and consists of purchased computers, software and related
equipment.

Property and Equipment

Property and equipment are stated at cost less accumulated
depreciation.
Depreciation is provided using primarily the straight-line
method over
estimated useful lives of the assets, primarily five to
seven years.

(continued)
LEVEL 8 SYSTEMS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. Description of the Company and Summary of Significant
Accounting Policies
- (continued)

Excess of Cost Over Net Assets Acquired

The excess of the purchase price and related costs over the
fair value of
the net assets of businesses acquired (goodwill) is
amortized on a
straight-line basis over ten and seven years for the
Bizware and Level 8
Technologies acquisitions, respectively. The Company
periodically
assesses the recoverability of goodwill by determining
whether the
amortization of the balance over its remaining life can be
recovered
through undiscounted future operating cash flows of the
acquired
operations. Accumulated amortization of goodwill was
$738,450 and
$445,306 at December 31, 1996 and 1995, respectively. In
connection with
the sale of Bizware, the Company wrote off goodwill
totaling $999,126.

Service Contracts Acquired

Service contracts acquired in connection with the
acquisition of ProfitKey
are amortized over 20 years based on the past history of
customer
retention for service contracts and the Company's
commitment to
continually update its product. Upon the cancellation of
any service
contract acquired, a pro rata portion of the cost is
expensed.
Accumulated amortization was $317,944 and $185,163 at
December 31, 1996
and 1995, respectively.

Software Development Costs

The Company capitalizes qualifying software development
costs after having
established technological feasibility and ends
capitalization when the
product is available for release to customers, consistent
with Statement
of Financial Accounting Standards No. 86. The Company
amortizes such
costs over a three-year period or the expected useful life
of the product,
whichever is shorter. Development costs which are
principally
attributable to enhancements and modifications of existing
products, and
which are expected to provide little or no future revenue,
are charged to
current period operations. Accumulated amortization was
$362,248 and $-0-
at December 31, 1996 and 1995, respectively. Amortization
of in-process
software development costs totaling 2,330,866 has not begun
as of December
31, 1996.

Accounting for Stock-Based Compensation

The Company accounts for employee stock options under
Accounting
Principles Board Opinion No. 25 and provides the pro forma
disclosures
required by Statement of Financial Accounting Standards
Board No. 123.

Net Income (Loss) Per Common Share

Primary earnings per share is determined by dividing the
net income (loss)
by the weighted average number of shares of common stock
outstanding and
dilutive common equivalent shares from stock options and
warrants. Prior
to the initial public offering, in accordance with
Securities and Exchange
Commission Regulations, common equivalent shares issued by
the Company
during the twelve-month period immediately preceding the
Company's initial
public offering were included in the calculation of shares
used in
computing net income (loss) per share as if they were
outstanding for all
periods presented, using the treasury stock method, even if
the effect was
anti-dilutive.
(continued)
LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and Summary of Significant
Accounting Policies -
(continued)

Reclassifications

Certain reclassifications were made to the 1995 and 1994
financial statements
to present them on a basis comparable with the current year.
The
reclassifications had no effect on previously reported net
income,
stockholders' equity, or net cash flows.

2. Acquisition -

Effective April 1, 1995, the Company purchased all of the
stock of Level 8
Technologies, Inc. (Level 8 Technologies) for cash of
$2,000,000 and 525,159
shares of common stock valued at $1,575,477 ($3.00 per
share). Employees and
shareholders of Level 8 Technologies also received options to
purchase an
aggregate of 39,164 shares at $1.37 per share and an
aggregate of 116,707
shares at $5.00 per share, respectively. Additional direct
costs of the
acquisition totaled $132,032. Level 8 Technologies was
incorporated and
commenced operations on February 24, 1994. The acquisition
was accounted for
as a purchase and, accordingly, the 1995 consolidated
statement of operations
includes the results of Level 8 Technologies since the date
of acquisition.

The cost was allocated as follows:

Cash $ 5,669
Accounts receivable 1,826,602
Property and equipment 53,626
Excess of cost over net assets acquired 2,828,391
Accounts payable and accrued expenses (586,811)
Other liabilities, primarily deferred income taxes (552,000)
Cost of net assets acquired $3,575,477

The following unaudited pro forma financial information shows
the results of
operations of the Company as if the Level 8 Technologies
acquisition had
occurred on January 1, 1995. The pro forma information is
provided for
information purposes only. It is based on historical
information and does not
necessarily reflect the actual results that would have
occurred, nor is it
necessarily indicative of future results of operations of the
consolidated
companies.

1995
Revenue
$12,080,000
Net income $
798,200
Net income per common share $
.17
Weighted average common and common equivalent shares
4,777,758
(continued)

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Property and Equipment -

Property and equipment consist of the following:

1996 1995
Computer equipment $ 937,583 $598,169
Furniture 211,066 88,921
Office equipment 160,726 111,910
Leasehold improvements 50,909 48,236
1,360,284 847,236
Less accumulated depreciation 402,174 260,355
$ 958,110 $ 586,881

4. Accrued Expenses -

Accrued expenses consist of the following:

1996 1995
Accrued compensation $ 132,712 $ 287,418
Accrued professional fees 138,969 83,091
Accrued costs on sale of subsidiary 143,000 -
Other accrued expenses 134,491 74,332
$ 549,172 $ 444,841

5. Long-Term Debt -
Long-term debt consists of various bank and finance company
loans, with
interest at 10.5% to 18.4% and collateralized by equipment.
Future
maturities of long-term debt are as follows: 1997 - $8,593;
1998 - $9,491;
1999 - $9,074; 2000 - $4,732.

6. Transactions With Related Companies -
Loans from Liraz Systems Ltd. (Liraz) and Liraz Export (1990)
Ltd.
(significant shareholders) totaling $3,528,172 were
noninterest bearing
through June 30, 1995. On July 1, 1995, the Company
converted $2,050,000 of
these loans to equity by issuing 471,264 shares of common
stock. The Company
paid $250,000 on the loan in April 1995 and made an
additional payment
of $600,000 from the initial public offering proceeds.

The remaining balance owed to Liraz was converted to a note
due in equal
quarterly installments of $34,822, including interest at 4%.
Interest
expense on the loan for 1996 and 1995 was $21,132 and
$12,319, respectively.

(continued)

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Transactions With Related Companies - (continued)

Future maturities of the loan are as follows:

Year Amount
1997 $ 122,000
1998 127,964
1999 133,177
2000 69,565
$ 452,706

In December 1995, the Company and Liraz entered into a
development agreement
for the joint development of certain software for a Microsoft
contract
obtained in July 1995. Liraz and the Company will each pay
50% of the total
project development costs. In exchange for providing 50% of
the project
development costs, Liraz will receive royalties of 30% of the
first
$2,000,000 in contract revenue, 20% of the next $1,000,000,
and 8%
thereafter.

In addition, the Company and Liraz were awarded an Israel -
U.S. Binational
Industrial Research and Development Foundation ("BIRD") grant
totaling
$432,000. The BIRD grant will reimburse up to 50% of the
development costs
of the above project. Once the products are sold, BIRD will
be paid a
royalty of 2.5% of related sales in the first year and 5% in
subsequent years
until BIRD has recovered 110% to 150% (depending on the
elapsed time) of its
payments. The Company estimates its 50% share of the total
project
development costs to be $600,000 before reimbursement of its
BIRD funds of
$216,000. The Company is capitalizing the software
development costs
associated with the project and reduces the capitalized costs
by any grant
funds received from BIRD. As of December 31, 1996, the
Company had
capitalized approximately $460,000 before reimbursement of
BIRD funds
totaling approximately $48,300.

Liraz provided software development and management service
totaling $293,463
and $60,503, respectively, in 1996. At December 31, 1996,
the Company had
a receivable of $35,000 from and a payable of $60,503 to
Liraz.

7. Preferred Stock, Common Stock, Unearned Compensation, Stock
Options, and
Warrants -

Preferred Stock

On May 31, 1995, the Board of Directors and on June 16,
1995, the shareholders authorized the Company to issue up to
1,000,000 shares of preferred stock, $.01 par value. No
shares are issued or outstanding.

Common Stock

On March 10, 1995, the Board of Directors and shareholders
voted to change the no par value common stock to $.01 par
value, to increase the authorized common stock from 200
shares to 8,000,000 shares, and to declare a stock split
resulting in the issuance of 200,000 shares for each share
outstanding at the time. On May 12, 1995, the Board of
Directors authorized a 1.45593157 to 1 common stock split.
Accordingly, all share information was retroactively
adjusted to reflect the recapitalization and stock splits.
On May 31, 1995, the Board of Directors and on June 16,
1995, the shareholders approved an increase in the
authorized shares of common stock from 8,000,000 shares to
15,000,000 shares.

7. Preferred Stock, Common Stock, Unearned Compensation, Stock
Options, and Warrants - (continued)

Common Stock - (continued)

On April 3, 1995, minority common shares of ProfitKey
totaling 1,254,725 were converted into 91,344 common shares
of Level 8 at an exchange rate of 13.74 shares of ProfitKey
stock for one share of Level 8 stock. The effect of the
conversion increased service contracts acquired by $238,854,
common stock by $913 and additional paid-in capital by
$273,119, and reduced minority interest by $35,178.

On July 27, 1995, the Company completed its public offering
of 1,430,000 shares (including 30,000 shares sold pursuant
to the underwriter's exercise of its over-allotment option)
at a price of $5.50 per share. The proceeds from the
initial public offering totaled $7,865,000 before costs of
$1,937,637.

On July 26, 1996, the Company sold 246,800 shares of common
stock to Candle Corporation at $11.00 per share before costs
of sale of $105,058.

On December 17, 1996, the Company completed a public
offering of 705,000 shares (including 45,000 shares sold
pursuant to the underwriter's exercise of its over-allotment
option) at a price of $11.00 per share before costs of
$1,277,803.

Unearned Compensation

Unearned compensation relates to stock options issued to
employees and represents the difference between the fair
market value of the stock at the grant date and the price to
be paid by the officer or employee. The original amount of
unearned compensation was $68,285. Compensation is
recognized as an expense over the period the employee
performs related services and totaled $30,194 and $27,621
for 1996 and 1995, respectively.

Stock Options

On February 2, 1995, the Company adopted the 1995 Stock
Incentive Plan, which
permits the issuance of incentive and nonstatutory stock
options, stock
appreciation rights, performance shares, and restricted and
unrestricted
stock to employees, officers, directors, consultants and
advisors. The Plan
reserves 900,000 shares of common stock for issuance upon the
exercise of
awards and provides that the term of each award be determined
by the Board
of Directors.

Under the terms of the Plan, the exercise price of the
incentive stock
options may not be less than the fair market value of the
stock on the date
of the award and the options are exercisable for a period not
to exceed five
years from date of grant. Stock appreciation rights entitle
the recipients
to receive the excess of the fair market value of the
Company's stock on the
exercise date, as determined by the Board of Directors, over
the fair market
value on the date of grant. Performance shares entitle
recipients to acquire
Company stock upon the attainment of specific performance
goals set by the
Board of Directors. Restricted stock entitles recipients to
acquire Company
stock subject to the right of the Company to repurchase the
shares in the
event conditions specified by the Board are not satisfied
prior to the end
of the restriction period. The Board may also grant
unrestricted stock to
participants at a cost not less than 85% of fair market value
on the date of
sale.

Options granted vest at varying periods up to 5 years and
expire in 10 years.

(continued)

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Preferred Stock, Common Stock, Unearned Compensation, Stock
Options, and Warrants -
(continued)

Stock Options - (continued)

Stock option activity during the years ended December 31,
1996 and 1995, was as follows:

1996 1995
Weighted
Weighted
Average
Average
Exercise
Exercise
Options Price Options
Price

OUTSTANDING,
beginning of year 489,678 $4.23 - $-

Granted 496,620 9.74 432,459 4.70
ProfitKey options
converted - - 72,742 .69
Exercised (80,156) .73 (1,209) .69
Forfeited (122,987) 9.10 (14,314) .90

OUTSTANDING,
end of year 783,155 7.31 489,678 4.23

1996 1995
Weighted
Weighted
Average
Average
Options Fair Options Fair
Granted Value Granted Value

Weighted Average Grant Date Fair Value:

Option price less
than stock price 187,420 $6.36 275,300 $3.88
Option price equals
stock price 309,200 7.15 229,901 1.80

496,620 $6.85 505,201 $2.93

Options outstanding and exercisable as of December 31, 1996,
are as follows:

Options Outstanding Options
Exercisable

Weighted Average

Weighted
Range of Remaining
Average
Exercise Exercise Contractual
Exercise
Prices Options Price Life-Years Options
Price

$.69 to $1.37 49,293 $1.17 8.2 17,030
$1.15
$5.00 to $6.60 362,862 5.57 8.4 199,543
5.72
$8.82 to 10.25 371,000 9.83 9.4 63,675
9.98
$.69 to $10.25 783,155 7.31 8.9 280,248
6.41
(continued)

7. Preferred Stock, Common Stock, Unearned Compensation, Stock
Options, and Warrants -
(continued)

Stock Options - (continued)

If the Company recognized compensation expense based on the
fair value at the grant dates for options under the Plan,
consistent with the method prescribed by Statement of
Financial Accounting
Standards No. 123, net income (loss)
and per share disclosures would change to the pro forma
amounts below:

1996 1995

Net income (loss):
As reported ($2,369,397)
$618,049
Pro forma ( 3,524,984)
107,698

Net income (loss) per common share:
As reported ( .39)
.13
Pro forma ( .58)
.02

The fair value of stock options used to compute pro forma net
income (loss)
and per share disclosures is the estimated present value at
grant date using
the Black-Scholes Option-Pricing model with the following
weighted average
assumptions:

1996 1995

Risk-free interest rate 6.44% 6.32%
Expected life - years 5 5
Expected volatility 75% 68%
Expected dividend 0% 0%

Stock Warrants

In connection with the renegotiation of ProfitKey's bank loan
in 1992,
warrants were issued to the bank to purchase 85,000 shares of
ProfitKey's
common stock at a price of $.50 per share. On April 3, 1995,
the warrants
were converted into 6,188 Level 8 stock warrants at an
exchange rate of 13.74
ProfitKey stock warrants for one Level 8 stock warrant. The
warrants are
exercisable at $6.87 per share, have a grant date fair value
of $.53 per
share, and expire on March 31, 1997.

In connection with the initial and second public offerings,
the Company
issued 140,000 and 110,000 warrants, respectively, to the
underwriter. These
warrants are exercisable for four years, commencing one year
from the
effective dates of the public offerings of July 27, 1995 and
December 17,
1996, at exercise prices of $7.425 and $14.85 per share,
respectively, and
have grant date fair values of $3.82 and $6.85 per share,
respectively.

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

7. Preferred Stock, Common Stock, Unearned Compensation, Stock
Options, and
Warrants -

Preferred Stock

On May 31, 1995, the Board of Directors and on June 16,1995,
the
shareholders authorized the Company to issue up to 1,000,000
shares of
preferred stock, $.01 par value. No shares are issued or
outstanding.

Common Stock

On March 10, 1995, the Board of Directors and shareholders
voted to
change the no par value common stock to $.01 par value, to
increase the
authorized common stock from 200 shares to 8,000,000 shares, and
to declare a
stock split resulting in the issuance of 200,000 shares for each
share
outstanding at the time. On May 12, 1995, the Board of Directors
authorized a
1.45593157 to 1 common stock split. Accordingly, all share
information was
retroactively adjusted to reflect the recapitalization and stock
splits. On
May 31, 1995, the Board of Directors and on June 16, 1995, the
shareholders
approved an increase in the authorized shares of common stock
from 8,000,000
shares to 15,000,000 shares.

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Preferred Stock, Common Stock, Unearned Compensation,
Stock Options,
and Warrants -
(continued)

Common Stock - (continued)

On April 3, 1995, minority common shares of ProfitKey
totaling
1,254,725 were converted into 91,344 common shares of Level 8 at
an exchange
rate of 13.74 shares of ProfitKey stock for one share of Level 8
stock. The
effect of the conversion increased service contracts acquired by
$238,854,
common stock by $913 and additional paid-in capital by $273,119,
and reduced
minority interest by $35,178.

On July 27, 1995, the Company completed its public
offering of
1,430,000 shares (including 30,000 shares sold pursuant to the
underwriter's
exercise of its over-allotment option) at a price of $5.50 per
share. The
proceeds from the initial public offering totaled $7,865,000
before costs of
$1,937,637.

On July 26, 1996, the Company sold 246,800 shares of
common stock to
Candle Corporation at $11.00 per share before costs of sale of
$105,058.

On December 17, 1996, the Company completed a public
offering of
705,000 shares (including 45,000 shares sold pursuant to the
underwriter's
exercise of its over-allotment option) at a price of $11.00 per
share before
costs of $1,277,803.

Unearned Compensation

Unearned compensation relates to stock options issued to
employees and
represents the difference between the fair market value of the
stock at the
grant date and the price to be paid by the officer or employee.
The original
amount of unearned compensation was $68,285. Compensation is
recognized as an
expense over the period the employee performs related services
and totaled
$30,194 and $27,621 for 1996 and 1995, respectively.

Stock Options

On February 2, 1995, the Company adopted the 1995 Stock
Incentive Plan,
which permits the issuance of incentive and nonstatutory stock
options, stock
appreciation rights, performance shares, and restricted and
unrestricted stock
to employees, officers, directors, consultants and advisors. The
Plan
reserves 900,000 shares of common stock for issuance upon the
exercise of
awards and provides that the term of each award be determined by
the Board of
Directors.

Under the terms of the Plan, the exercise price of the
incentive stock
options may not be less than the fair market value of the stock
on the date of
the award and the options are exercisable for a period not to
exceed five
years from date of grant. Stock appreciation rights entitle the
recipients to
receive the excess of the fair market value of the Company's
stock on the
exercise date, as determined by the Board of Directors, over the
fair market
value on the date of grant. Performance shares entitle
recipients to acquire
Company stock upon the attainment of specific performance goals
set by the
Board of Directors. Restricted stock entitles recipients to
acquire Company
stock subject to the right of the Company to repurchase the
shares in the
event conditions specified by the Board are not satisfied prior
to the end of
the restriction period. The Board may also grant unrestricted
stock to
participants at a cost not less than 85% of fair market value on
the date of
sale.

Options granted vest at varying periods up to 5 years and
expire in 10
years.

(continued)

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Preferred Stock, Common Stock, Unearned Compensation,
Stock Options,
and Warrants -
(continued)

Stock Options - (continued)

Stock option activity during the years ended December 31,
1996 and
1995, was as follows:

1996

1995
Weighted

Weighted
Average

Average
Exercise

Exercise
Options Price
Options
Price

OUTSTANDING, beginning of year 489,678 $4.23
-
$-

Granted 496,620 9.74
432,459
4.70
ProfitKey options converted - -
72,742
.69
Exercised (80,156) .73
(1,209)
.69
Forfeited (122,987) 9.10
(14,314)
.90

OUTSTANDING, end of year 783,155 7.31
489,678
4.23

1996

1995

Weighted

Weighted
Average

Average
Options Fair
Options
Fair
Granted Value
Granted
Value

Weighted Average Grant Date Fair Value:

Option price less than stock price 187,420 $6.36
275,300
$3.88
Option price equals stock price 309,200 7.15
229,901
1.80

496,620 $6.85
505,201
$2.93

Options outstanding and exercisable as of December 31, 1996,
are as
follows:

Options Outstanding
Options
Exercisable

Weighted Average

Weighted
Remaining

Average
Range of Exercise Exercise Contractual

Exercise
Prices Options Price Life-Years
Options
Price
$.69 to $1.37 49,293 $1.17 8.2
17,030
$1.15
$5.00 to $6.60 362,862 5.57 8.4
199,543
5.72
$8.82 to 10.25 371,000 9.83 9.4
63,675
9.98

$.69 to $10.25 783,155 7.31 8.9
280,248
6.41
(continued)

7. Preferred Stock, Common Stock, Unearned Compensation,
Stock Options,
and Warrants -
(continued)

Stock Options - (continued)

If the Company recognized compensation expense based on
the fair value
at the grant dates for options
under the Plan, consistent with the method prescribed by
Statement of
Financial Accounting Standards No.
123, net income (loss) and per share disclosures would
change to the
pro forma amounts below:

1996
1995

Net income (loss):
As reported ($2,369,397)
$618,049
Pro forma ( 3,524,984)
107,698

Net income (loss) per common share:
As reported ( .39)
.13
Pro forma ( .58)
.02

The fair value of stock options used to compute pro forma
net income
(loss) and per share disclosures is
the estimated present value at grant date using the
Black-Scholes
Option-Pricing model with the following
weighted average assumptions:

1996
1995

Risk-free interest rate 6.44%
6.32%
Expected life - years 5
5
Expected volatility 75%
68%
Expected dividend rate 0%
0%

Stock Warrants

In connection with the renegotiation of ProfitKey's bank
loan in 1992,
warrants were issued to the bank
to purchase 85,000 shares of ProfitKey's common stock at a
price of
$.50 per share. On April 3, 1995,
the warrants were converted into 6,188 Level 8 stock
warrants at an
exchange rate of 13.74 ProfitKey
stock warrants for one Level 8 stock warrant. The
warrants are
exercisable at $6.87 per share, have a
grant date fair value of $.53 per share, and expire on
March 31, 1997.

In connection with the initial and second public
offerings, the Company
issued 140,000 and 110,000
warrants, respectively, to the underwriter. These
warrants are
exercisable for four years, commencing one
year from the effective dates of the public offerings of
July 27, 1995
and December 17, 1996, at exercise
prices of $7.425 and $14.85 per share, respectively, and
have grant
date fair values of $3.82 and $6.85
per share, respectively.

All warrants issued were exercisable and outstanding at
December 31,
1996, and had a weighted average
exercise price and grant date fair value of $10.60 and
$5.04,
respectively.

(continued)

7. Preferred Stock, Common Stock, Unearned Compensation, Stock
Options, and
Warrants - (continued)

Stock Warrants - (continued)

Weighted average assumptions used to price grant date fair
value of
warrants are primarily the same as for stock options with the
following
exceptions.

1996 1995

Risk-free interest rate 6.50% 5.92%
Expected life-years 4 3.92
Expected volatility 76% 68%

8. Sale of Subsidiary - Bizware

On September 9, 1996, the Company sold Bizware for $230,000,
resulting in
a loss on the sale of the subsidiary of $1,484,601. The
sales price
consisted of $120,000 in cash and $110,000 due in six equal
monthly
installments through March 1997. In connection with the
sale, the Company
wrote off goodwill of $999,126, software development costs of
$501,665,
property and equipment of $78,877, and other costs were
accrued or
expended in connection with the sale totaling $134,933.

9. Income Taxes -

Income tax expense (benefit) consists of the following:

1996 1995 1994

Current:
Federal ($97,800) $320,600 $ -
State (17,200) 60,000 20,000
Foreign (101,400) (20,900) 90,200
(216,400) 359,700 110,200

Deferred:
Federal 130,700 (141,100) 4,800
State 23,000 (24,900) 18,200
Foreign (85,000) 85,000 -
68,700 (81,000) 23,000
($147,700) $278,700 $133,200
(continued)

9. Income Taxes - (continued)

Income tax expense (benefit) computed at the statutory
federal income tax
rate is as follows:
1996 1995 1994
Tax at statutory
federal rate - 34% ($855,800) $310,100 $243,600
State taxes, net of federal
tax benefit 300 17,900 (19,700)
Effect of foreign tax
rates and credits 7,500 (126,100) (40,400)
Change in deferred tax
asset valuation allowance - (129,000) -
Net operating loss carryforward
not recognized (utilized) for
financial statement purposes - - (87,700)
Rate differences 14,900 38,800 19,600
Nondeductible goodwill amortization 181,500 159,100 13,900
Nondeductible expenses 14,200 7,600 -
Nondeductible loss on sale of
foreign subsidiary 487,100 - -
Other
2,600 300 3,900

Income tax expense (benefit) ($147,700) $278,700 $133,200

Significant components of net deferred tax asset (liability)
are as
follows:
1996 1997
Current Long-Term Current Long-Term
Assets Assets Assets Assets
Deferred tax
assets:
Allowance for uncollect-
ible accounts receivable $113,000 - $ 22,600 -
Accrued expenses not
currently deductible
for tax purposes 51,600 - 63,300 -
Deferred revenue 381,400 - 451,200 -
Net operating loss
carryforwards 35,200 334,800 35,200 370,200
Unearned compensation - 22,000 - 11,000
581,200 356,800 572,300 381,200
Deferred tax liabilities:
Depreciation and amortization - (455,800) (39,200) (98,300)
Change from cash
to accrual basis (6,400) (6,500) (265,100) (12,900)
(6,400) (462,300) (304,300) (111,200)

Deferred tax asset valuation
allowance 243,600 (243,600) - (243,600)

Net deferred tax
asset (liability) $331,200) ($105,500) $268,000 $26,400
(continued)

9. Income taxes - (continued)

At December 31, 1996, the Company has approximate net
operating loss
carryforwards of $925,000 from the acquisition of ProfitKey,
which may be
applied against future taxable income. Under Internal
Revenue Code
Section 382, as a result of the change in controlling
interest of
ProfitKey, the Company's ability to utilize these acquired
net operating
loss carryforwards is limited to approximately $88,000 each
year. The
carryforwards are cumulative if not utilized each year and
expire
primarily in the year 2008.

10. Commitments -

Operating Leases

The Company leases facilities under operating leases expiring
through
November 2000. The leases provide for base monthly rents
totaling
approximately $35,000 plus an adjustment based on the
increase in
operating expenses or lessor's property taxes over the base
amounts, as
defined in the leases. Some leases contain renewal options.

Rent expense was approximately $464,000, $272,000, and
$80,000 for 1996,
1995, and 1994, respectively.

Approximate future minimum leases payments are as follows:

Year Amount

1997 $ 412,000
1998 398,000
1999 309,000
2000 113,000
$1,232,000

Employment Agreements

The Company has employment agreements with four officers of
the Company
for salaries totaling $475,000 annually through May 1998,
plus performance
bonuses for three of the officers.

11. Significant Customers -

Information regarding revenue from significant customers is
as follows:
Years Ended December 31,
1996 1995 1994

Customer A 10.6% - -

Customer B - - 24.0%
Customer C - - 11.8%
(continued)

12. Employee Benefit Plan -

The Company adopted a 401(k) retirement plan for qualified
employees. The
Company has not made any contributions to the Plan.

13. Foreign Operations -

Foreign operations consist of the operations of Bizware, a
Canadian
subsidiary, acquired October 28, 1994 and sold September 9, 1996.
All Bizware
sales were to customers located in North America. Financial
information as of
and for the years ended December 31, 1996, 1995 and 1994, is as
follows:

Years Ended December 31,
1996 1995 1994

Revenues $363,200 $1,405,900 $565,400
Operating income (loss) (350,600) 581,900 378,200
Identifiable assets - 706,600 309,000

PART III

Item 10. Directors and Executive Officers of the Registrant

Certain information relating to directors and executive
officers of the
Company is incorporated by reference herein from the Company's
definitive
proxy statement in connection with its Annual Meeting of
Shareholders to be
held on May 6, 1997, which proxy statement will be filed with the
Securities
and Exchange Commission not later than 120 days after the close
of the
Company's fiscal year ended December 31, 1996.

Item 11. Executive Compensation

Certain information relating to remuneration of directors and
executive
officers and other transactions involving management is
incorporated by
reference herein from the Company's definitive proxy statement in
connection
with its Annual Meeting of Shareholders to be held May 6, 1997,
which proxy
statement will be filed with the Securities and Exchange
Commission not later
than 120 days after the close of the Company's fiscal year
ended December 31, 1996.

Item 12. Security Ownership of Certain Beneficial Owners and
Management

Certain information relating to security ownership of certain
beneficial
owners and management is incorporated by reference herein from
the Company's
definitive proxy statement in connection with its Annual Meeting
of
Shareholders to be held on May 6, 1997, which proxy statement
will be filed
with the Securities and Exchange Commission not later than 120
days after the
close of the Company's fiscal year ended December 31, 1996.

Item 13. Certain Relationships and Related Transactions

Certain information relating to certain relationships and
related
transactions is incorporated by reference herein from the
Company's definitive
proxy statement in connection with its Annual Meeting of
Shareholders to be
held on May 6, 1997, which proxy statement will be filed with the
Securities
and Exchange Commission not later than 120 days after the close
of the
Company's fiscal year ended December 31, 1996.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K

(a)1. Financial Statements

The following consolidated financial statements are included
in Item 8:

Independent Auditor's Report

Consolidated Statements of Operations for the years ended
December 31,
1996, 1995 and 1994.

Consolidated Balance Sheets as of December 31, 1996 and 1995.

Consolidated Statements of Changes in Shareholders' Equity
for the years
ended December 31, 1996, 1995 and 1994.

Consolidated Statements of Cash Flows for the years ended
December 31,
1996, 1995 and 1994.

Notes to Consolidated Financial Statements.

(b)1. Reports on Form-8K

On September 9, 1996 the Company filed Form 8-K to record the
sale of
substantially all of the assets of Bizware Computer Systems
(Canada) Inc.

2. Financial Statement Schedule

The following consolidated financial statement schedule
is included
in Item 14 (b):

Schedule
II - Valuation and Qualifying Accounts.

Schedules other than those listed above have been omitted
since they are
either not required or the information is otherwise included.

3. Listing of Exhibits

Exhibits

3.1 Restated Certificate of Incorporation of
Registrant (filed
as exhibit 3.1 to Registration Statement No.
33-92230 on
Form S-1 and incorporated herein by reference).

3.2 By-Laws of Registrant. (filed as exhibit 3.2 to
Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein
by reference).
10.1 1995 Stock Incentive Plan, as amended (filed as
exhibit 10.1
to Registration Statement No. 333-15455 on Form
S-1 and
incorporated herein by reference).
10.2 Stock Purchase Warrant issued by ProfitKey to
Fleet Bank-NH
for 85,000 shares of common stock of ProfitKey
dated January
28, 1992 (filed as exhibit 10.2 to Registration
Statement
No. 33-92230 on Form S-1 and incorporated
herein by
reference).
10.3 Letter of agreement, dated May 14, 1993,
between Fleet
Bank-NH and ProfitKey (filed as exhibit 10.3 to
Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein
by reference).
10.4 Consulting Services Agreement, dated March 17,
1994, between
Norwest Technical Services, Inc. and Level 8
(filed as
exhibit 10.4 to Registration Statement No.
33-92230 on Form
S-1 and incorporated herein by reference).
10.5 Letter of Engagement, dated August 16, 1994,
between Norwest
Mortgage, Inc. and Level 8 (filed as exhibit
10.5 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.6 Stock Purchase Agreement, dated September 28,
1994 among
Liraz, R.W. Allsop & Associates II, L.P., HLM
Partners,
L.P., Kitty Hawk Capital, Ltd. and the United
States Small
Business Administration (filed as exhibit 10.6
to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.7 Amendment to Stock Purchase Agreement, dated
September 29,
1994 among Liraz, R.W. Allsop & Associates II,
L.P., HLM
Partners, L.P., Kitty Hawk Capital, Ltd. and
the United
States Small Business Administration (filed as
exhibit 10.7
to Registration Statement No. 33- 92230 on
Form S-1 and
incorporated herein by reference).
Exhibits

10.8 Letter Agreement, dated February 19, 1995,
between Bizware
and Joel Leonoff (filed as exhibit 10.8 to
Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein
by reference).
10.9 Software Acquisition Agreement dated February
23, 1995 among
SASI, Bizware and Registrant (filed as exhibit
10.9 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.10 Service Agreement, dated March 31, 1995,
between Level 8 and
Transaction Information Systems, Inc. (filed
as exhibit
10.10 to Registration Statement No. 33-92230 on
Form S-1
and incorporated herein by reference).

10.11 Form of Amended and Restated Contribution
Agreement,
effective April 1, 1995, among Registrant and
the
shareholders of Level 8 (filed as exhibit 10.11
to
Registration Statement No. 33-92230 on Form
S-1 and
incorporated herein by reference).
10.12 Employment Agreement, effective April 1, 1995,
between Level
8 and Samuel Somech (filed as exhibit 10.11 to
Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein
by reference).
10.12A Form of Amendment, dated June , 1995, among
Level 8,
Registrant and Samuel Somech (filed as exhibit
10.12A to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.13 Consulting Agreement, effective April 1, 1995,
between Level
8 and Theodore Fine (filed as exhibit to
Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein
by reference).
10.13A Form of Amendment, dated June , 1995, among
Level 8,
Registrant and Theodore Fine (filed as exhibit
10.13A to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.14 Consulting Agreement, dated April 4, 1995,
among Bizware and
Daimin Investments Ltd. (filed as exhibit 10.14
to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.15 Employment Agreement, dated May 1, 1995,
between Registrant
and Arie Kilman (filed as exhibit to
Registration Statement
No. 33-92230 on Form S-1 and incorporated
herein by
reference).
10.15A Amendment to Employment Agreement, dated as of
September 18,
1996, between Registrant and Arie Kilman (filed
as exhibit
10.14A to Registration Statement No. 333-15455
on Form S-1
and incorporated herein by reference).
10.15B Amendment No.2 to Employment Agreement, dated
as of December
16, 1996, between Registrant and Arie Kilman
(filed as
exhibit 10.14B to Registration Statement No.
333-15455 on
Form S-1 and incorporated herein by reference).
10.16 Employment Agreement, dated May 1, 1995,
between Registrant
and Robert R. MacDonald (filed as exhibit
10.16 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.16A Amendment to Employment Agreement, dated as of
February 21,
1996, between Registrant and Robert MacDonald
(filed

Exhibits

as exhibit 10.15A to Registration Statement No.
333-15455 on
Form S-1 and incorporated herein by reference).
10.16B Amendment to Employment Agreement, dated as of
July 30,
1996, between Registrant and Robert MacDonald
(filed as
exhibit 10.15B to Registration Statement No.
333-15455 on
Form S-1 and incorporated herein by reference).
10.17 Employment Agreement, dated May 1, 1995,
between Registrant
and Joseph J. Di Zazzo (filed as exhibit 10.18
to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.17A Amendment to Employment Agreement, dated as of
October 23,
1996, between Registrant and Joseph J. Di Zazzo
(filed as
exhibit 10.18A to Registration Statement No.
333-15455 on
Form S-1 and incorporated herein by
reference).
10.18 Agreement AD/Ventures and Liraz Export Systems
Ltd. (filed
as exhibit 10.19 to Registration Statement No.
33-92230 on
Form S-1 and incorporated herein by reference).
10.19 Standard Program Product License Agreement of
ProfitKey
(filed as exhibit 10.20 to Registration
Statement No.
33-92230 on Form S-1 and incorporated herein by
reference).
10.20 Standard Computer Hardware Purchase Agreement
of ProfitKey
(filed as exhibit 10.21 to Registration
Statement No.
33-92230 on Form S-1 and incorporated herein by
reference).
10.21 Standard Software License Agreement of Bizware
and Standard
Escrow Agreement (filed as exhibit 10.22 to
Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein
by reference).
10.22 Agreement, dated June 13, 1995, between
Registrant and Liraz
(filed as exhibit 10.23 to Registration
Statement No.
33-92230 on Form S-1 and incorporated herein by
reference).
10.23 Registration Rights Agreement, dated June 13,
1995 between
Registrant and Liraz (filed as exhibit 1 to
Registration
Statement 33-92230 on Form S-1 and incorporated
herein by
reference).
10.24 Agreement of Purchase and Sale, dated October
28, 1994 among
Joel Leonoff, Russell Rothstein, Mitchell
Wasserman, Daimin
Investments Ltd., 2993031 Canada Inc., 2962594
Canada Inc.,
3077934 Canada Inc. and Bizware Computer
Systems (Canada)
Inc. (filed as exhibit 10.25 to Registration
Statement No.
33-92230 on Form S-1 and incorporated herein
by reference).
10.25 Addendum dated February 14, 1995 among Joel
Leonoff, Russell
Rothstein, Mitchell Wasserman, Daimin
Investments Ltd.,
2993031 Canada Inc., 2962594 Canada Inc.,
3077934 Canada
Inc. and Bizware Computer Systems (Canada) Inc.
(filed as
exhibit 10.26 to Registration Statement No.
33-92230 on
Form S-1 and incorporated herein by reference).
10.26 Form of Warrant Agreement between the
Registrant and
Hampshire Securities Corporation for 135,000
shares of
common stock (filed as exhibit 10.27 to
Registration
Statement No. 33-92230 on Form S-1 and
incorporated herein
by reference).
10.27 Form of Loan Agreement, dated June , 1995,
between
Registrant and Liraz regarding Registrant's
agreement to
repay the principal amount of $1,228,172 (filed
as exhibit
10.28 to Registration Statement No. 33-92230
on Form S-1
and incorporated herein by reference).
10.28 Form of Loan Agreement, dated 1995, between
Registrant and
Liraz regarding Registrant's agreement to
repay the
Exhibits

principal amount of $628,172 (filed as exhibit
10.29 to
Registration Statement No. 33-92230 on Form
S-1 and
incorporated herein by reference).
10.29 Form of exchange agreement dated 1995, between
Registrant
and Liraz (filed as exhibit to Registration
Statement No.
33-92230 on Form S-1 and incorporated herein by
reference).

10.30 Consulting Agreement dated May 15, 1995 between
Registrant
and Nellcor Incorporated (filed as exhibit
10.31 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.31 Stock Purchase Agreement dated September 9,
1994 by and
among Liraz Systems, Ltd., Richard T. Lilly
and the other
individuals whose names appear on the signature
page thereto
(filed as exhibit 10.32 to Registration
Statement No.
33-92230 on Form S-1 and incorporated herein
by reference).
10.32 Exchange Agreement dated September , 1994
between Liraz and
the individuals whose names appear on the
signature page
thereto (filed as exhibit 10.33 to Registration
Statement
No. 33-92230 on Form S-1 and incorporated
herein by
reference).
10.33 Stock Purchase Agreement dated October 17, 1994
by and among
Liraz and Gary E. Frashier (filed as exhibit
10.34 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.34 Stock Purchase Agreement dated October , 1994
by and among
Liraz and William Dockins (filed as exhibit
10.35 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.35 Stock Purchase Agreement dated October 24, 1994
by and among
Liraz and Alfred L. Whiting (filed as exhibit
10.36 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.36 Certificate of Ownership and Merger of PK
Holdings Inc. into
ProfitKey International, Inc. dated March 30,
1995 (filed
as exhibit 10.37 to Registration Statement No.
33-92230 on
Form S-1 and incorporated herein by reference).
10.37 Development Agreement dated July 17, 1995
between Microsoft
Corporation and Level 8 (filed as exhibit
10.38 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.38 Letter Agreement dated June 1, 1995 from Visa
International
Service Association to Level 8 (filed as
exhibit 10.39 to
Registration Statement No. 33-92230 on Form S-1
and
incorporated herein by reference).
10.39 Development Agreement dated December 19, 1995
between Liraz
and Level 8.
10.40 Development Agreement dated October 23, 1995
between Liraz
and ProfitKey.
10.41 Product Purchase Agreement, dated August 30,
1996, between
Candle Corporation and Level 8 (filed as
exhibit 10.40 to
Registration Statement No. 333-15455 on Form
S-1 and
incorporated herein by reference).
10.42 Investment Agreement, dated July 26, 1996,
among Registrant,
Liraz and Candle Corporation (filed as exhibit
10.41 to
Registration Statement No. 333-15455 on Form
S-1 and
incorporated herein by reference).

Exhibits

10.43 Candle Corporation Software Agency Agreement,
dated October
7, 1996, between Candle Corporation and Level 8
(filed as
exhibit 10.42 to Registration Statement No.
333-15455 on
Form S-1 and incorporated herein by reference).
10.44 IBM Licensing Agreement: NT Client Bridge,
dated February
28, 1996, by and between International Business
Machines and
Level 8 (filed as exhibit 10.43 to Registration
Statement
No. 333-15455 on Form S-1 and incorporated
herein by
reference).
11.0 Statement re: computation of per share income
(loss).
21.1 List of Subsidiaries of Registrant (filed as
exhibit 21.1 to
Registration Statement No. 33- 92230 on Form
S-1 and
incorporated herein by reference).
23.2 Consent of Lurie, Besikof, Lapidus & Co., LLP.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange
Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the
undersigned,
thereunto duly authorized.
Level 8 Systems, Inc.

By: s/ Arie Kilman
Arie Kilman
Chief Executive Officer
and Director

Dated: March 13, 1997

Pursuant to the requirements of the Securities Exchange Act
of 1934, this
report has been signed below by the following persons on behalf
of the
registrants and in the capacities and on the date indicated.

Signature Title Date

s/ Arie Kilman Chief Executive Officer March 13,
1997
(Arie Kilman) and Director

s/ Robert R. MacDonald Chairman of the Board March 13, 1997
(Robert R. MacDonald)

s/ Samuel Somech President and Director March 13, 1997
(Samuel Somech)

S/ Joseph J. Di Zarro Controller, Chief March 13, 1997
(Joseph J. Di Zarro) Accounting Officer,
Treasurer and Secretary

s/ Theodore Fine Director March 13,
1997
(Theodore Fine)

S/ Lenny Recanati Director March 13,
1997
(Lenny Recanati)

s/ Frank J. Klein Director March 13,
1997
(Frank J. Klein)

SCHEDULE II

LEVEL 8 SYSTEMS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

Column A Column B Column C Column D
Column E
Additions

Charged
Balance Charged to Other Deduc-
at Be- to Costs Accounts- tions-
Balance
ginning and Ex- Describe Describe
at End
Description of Period penses (1) (2)
of Period

Year ended
December 31,
1994
Deducted
from asset
accounts:
Allowance
for
doubtful
accounts $ - $ 39,319 $102.286 ($85,605)
$ 56,000

Year ended
December 31,
1995
Deducted
from asset
accounts:
Allowance
for
doubtful
accounts $56,000 $ 96,613 $ - ($77,613) $
75,000

Year ended
December 31,
1996
Deducted
from asset
accounts:
Allowance
for
doubtful
accounts $75,000 $231,000 $ - ($26,000)
$282,000

(1) Allowance for doubtful accounts acquired in connection
with ProfitKey
International, Inc. and Bizware Computer Systems
(Canada) Inc.
(2) Uncollectible accounts written off, net of recoveries.